Rethinking the Welfare State’s Perverse Incentives

The system tells the poor: if you dare make more money, we will take away your housing subsidy, food stamps, and income support. (Juan Rubiano)

EspañolThe term “welfare state” has become political fodder; coarse rhetorical food used to feed a docile electorate with pro or against platitudes. The topic is critically important to democracy and deserves more thoughtful discussion.

The etymology of the term also adds to its conceptual mystification. In some countries, the term used translates as: “social state,” in others as “state of well-being,” or “state of social well-being,” or “providing state,” or “social providence,” and more.

Welfare state covers a variety of significantly different forms of economic and social organization. But essentially, a welfare state is a theory of government in which the state transfers funds from some individuals to others, seeking to enhance the social and economic well-being of the latter at the expense of the former.

If government is going to provide something, it needs the money to do so, and in a welfare state the government positions itself as a wealth-transfer mechanism.

Danish social scientist Gøsta Esping-Andersen, one of the most influential writers on welfare states, describes three main types of welfare states typical of developed capitalist nations: the Liberal model, the Corporatist-Statist model, and the Social Democratic model. Esping-Andersen’s typology roughly parallels the predominant modern political movements of Liberalism, Christian Democracy, and Social Democracy.

The liberal model is based on market principles and private provision. Its main feature is “means-tested” assistance. In the Liberal model, the state steps in only to ameliorate poverty and provide for basic needs. The United States, Australia, Canada, Japan, New Zealand, and Switzerland are examples.

The corporatist-Statist model is based on a principle of subsidiarity and features social insurance schemes more than social assistance. They rely on an autonomous, mutualist provision of benefits based on previously made insurance contributions. These models are often shaped by Christian doctrine and tend to emphasize the family and family benefits. Austria, Belgium, France, Germany, Italy, and Spain may be said to have a Corporatist-Statist welfare model.

The social-democratic model grants universal access, typically based on citizenship, to benefits and services provided by the state. These models limit reliance on both the family and the market, require high levels of taxation, and are often perceived as anti-market. Examples are Denmark, Finland, Netherlands, Norway, and Sweden.

The history of modern welfare states can be traced to efforts to undermine the appeal of socialist movements. In the twentieth century, fascists used the paternalism of welfare states to lure workers away from unions and socialism. Thus, criticism of the welfare state flows from both the left and the right.

Socialists decry welfare states as efforts to strengthen free-market systems, which are counterproductive to the socialist objective of replacing a capitalist economy with a socialist economic system. Karl Marx warned that measures to increase wages, improve working conditions, and provide social insurance, were bribes that would weaken revolutionary consciousness.

On the other hand, conservatives believe that the effects of welfare programs weaken the traditional social bonds of family, friends, religious and other non-governmental aid organizations. And that government welfare fosters immature and irresponsible attitudes in many recipients. This irresponsible behavior builds hostility between the groups taxed to provide benefits and the recipients of the benefits.

Classical liberals, argue that welfare states pervert economic incentives and the rule of law. A welfare state must engage an extensive and intrusive government bureaucracy with discretionary powers over the welfare of the recipients. That is, bureaucrats are provided with money and resources to be distributed discretionarily to the citizenry. From the perspective of classical liberalism, this undermines the rule of law, the vigor, and the sovereignty of the citizenry.

Milton Friedman argued this case well. Providing public support to those poor deemed worthy by the bureaucrats, and then, removing this support when they begin to stand on their own feet, poisons their incentives. The system tells the poor: if you dare make more money, we will take away your housing subsidy, food stamps, and income support.

We can, and must do better, but it requires us to get past the political platitudes and to rethink the best way to assist the less fortunate among us.